After U.S. economic output contracted for the second straight quarter based on data reported for the quarter ended in June 2022, the largest economic question is whether the U.S. economy is currently in a recession. Despite the debate over whether the U.S. economy is currently experiencing a broad slowdown in activity, the consensus among economists is that the economy will slip into a mild recession by the beginning of 2023 as short-term interest rates continue to rise to combat persistently high inflation.
U.S. real gross domestic product (GDP) decreased at an annual rate of 0.6% in the second quarter of 2022 according to the Bureau of Economic Analysis. In the first quarter, real GDP decreased 1.6%. The decrease in second quarter GDP is attributed to decreases in inventories, residential investment, government spending, and higher imports, which were partly offset by increases in exports and consumer spending. Despite the overall economic slowdown in the second quarter, the labor market remains resilient. Employers continue to demonstrate strong demand for labor with 1.2 million jobs added to payrolls in the second quarter and over 800,000 jobs in July and August combined.
The U.S. Bureau of Labor Statistics reported that its headline Consumer Price Index (CPI) cooled in July, slowing from an increase of 1.3% in June to almost no change in prices in July. Energy prices were the primary contributor to lower inflation, with gasoline prices down 7.7% in July. The recent decline in gasoline prices is a benefit to the economy, but core inflation continues to run well above the 2% inflation target of the U.S. Federal Reserve. The core CPI increased 0.3% in July but has increased at a 6.8% annualized pace over the past three months.
Supply Chain
Supply chain disruptions have been a notable factor in contributing to inflation pressures dating back to 2021. Recent reports citing the Logistics Managers’ Index, as well as supply chain indices managed by the New York Federal Reserve and Oxford Economics, indicate that both domestic and global supply chain performance has improved in recent months. However, recent reports also show that warehouse and inventory costs are still rising at near-peak levels, and transportation costs are still rising at a much higher rate than before the COVID-19 pandemic.
Agricultural supply chains remain impacted by improving, yet still turbulent logistics. Grain rail car availability and prices were at multi-year lows and highs, respectively, in the second quarter before improving in mid-late summer. Recent declines in rail rates have been partially offset by increases in fuel surcharges. Grain export vessel rates are also approaching with multi-year highs. Despite measures to improve agriculture’s access to shipping vessels returning to Asia from California, the share of vessels leaving port empty was still 70% based on the most recently available data. Truck rates have shown the most consistent decline but remain far above pre-pandemic levels. Truck availability, however, is markedly improved.
The Financial Side
The backdrop for U.S. monetary policy decisions remains unchanged from the first half of 2022. Payrolls continue to demonstrate strong growth and core inflation is still running well above targeted levels. Given these factors, the Federal Open Market Committee (FOMC) increased the Federal Funds Rate by another 75 basis points at its September 2022 meeting. Past September, the pace of interest rate increases is anticipated to remain steady before slowing later in 2023 should employment gains and inflation both moderate.
Current agricultural commodity prices continue to benefit from the higher inflation environment, with the most recent Farm Sector Income Forecast from the U.S. Department of Agriculture (USDA) calling for a 21.2% increase in farm cash receipts in 2022. Of the $91.7 billion year-over-year increase currently expected for farm receipts, higher commodity costs are expected to contribute $80.4 billion while increased production and other factors are expected to contribute $11.3 billion to the increase. Combined receipts for corn, soybeans, and wheat are forecast to increase by $30.7 billion, accounting for most of the net increase, and receipts are expected to fall for potatoes, fruits and nuts. Total animal/animal product cash receipts are expected to increase by $55.3 billion. Growth in receipts is forecast for all major animal/animal products, with the largest percentage increases expected for broilers, milk, and chicken eggs. After reaching a record high of $45.5 billion in calendar year 2020, direct Government farm program payments are estimated to have decreased to $25.8 billion in 2021. They are forecast to decrease further to $13.0 billion in 2022.
Agriculture Outlook
The agricultural outlook for 2022 and 2023 is growing more uncertain due to the continued materialization of downside risks and market volatility. Previous growth projections are moderated due to ongoing trade disruptions, above-target inflation rates, and rising energy prices. Global GDP is projected to increase by 3.2% percent in 2022 and increase by 2.9% in 2023. The Russian invasion of Ukraine is ongoing and continues to impose far-reaching economic disruptions that have thus far led to elevated energy prices that continue to disproportionately affect the European market. Supply chain complications have slowly abated, but spot shipping rates remain elevated compared with their pre-pandemic levels.
Crude oil prices have continued to fall in recent months. Natural gas prices have temporarily plateaued but remain elevated significantly above their 10-year averages. Germany has embarked on a rapid plan to add additional liquified natural gas (LNG) terminals to receive LNG shipments, as gas flows from Russia remain lower and more unreliable. Reduced flows from Russia have led to concerns of gas shortages and even higher prices when gas demand rises in the upcoming winter months. The consideration of natural gas prices as inputs to nitrogen fertilizer remains a concern for elevated fertilizer cost projections.
U.S. agricultural exports in fiscal year 2023 are projected to be down $2.5 billion from 2022. This decrease is primarily driven by lower exports of cotton, beef, and sorghum that are partially offset by higher exports of soybeans and horticultural products. Total 2023 grain and feed exports are forecast down $1.3 billion while soybean exports are forecast to be up $2.2 billion due to higher prices.
2023 livestock, poultry, and dairy exports are forecast to be down $1.5 billion on declines in most product groups. Beef exports are forecast down $1.1 billion as higher prices fail to offset lower volumes driven by tight U.S. supplies. Dairy products are forecast $500 million lower. Beef and pork variety meats are forecast $100 million lower on a reduction in beef variety meat volume and slightly lower pork unit values. Poultry and products are forecast $100 million lower on a decline in broiler and turkey meat volumes as well as broiler meat values. Pork exports are forecast up $200 million as higher volumes more than offset lower unit values.
Agricultural exports to China in 2023 are forecast at $36.0 billion, unchanged from 2022, as higher soybean exports offset lower cotton and sorghum prospects. Agricultural exports to Canada and Mexico are forecast at $28.5 billion each, also unchanged from 2022.
To view the article in the online 2022 Fall Partners Magazine, click here.
